About Personal Finance
Personal Financial Planning, in the broadest sense, is an effort to manage all aspects of a person/family’s financial affairs. Classically, that begins with planning family spending and extends through risk management (insurance), taxes, wealth accumulation, investing, and wealth distribution (retirement and estate planning).
In general, personal financial planning has five steps:
- Assessment: One’s personal financial situation can be assessed by compiling simplified versions of financial balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, bank loan, mortgage). A personal income statement lists personal income and expenses.
- Setting goals: Two examples are “retire at age 65 with a personal net worth of $1,000,000” and “buy a house in 3 years paying a monthly mortgage servicing cost that is no more than 25% of my gross income”. It is not uncommon to have several goals, some short term and some long term. Setting financial goals helps direct financial planning.
- Creating a plan: The financial plan details how to accomplish your goals. It could include, for example, reducing unnecessary expenses, increasing one’s employment income, or investing in the stock market.
- Execution: Execution of one’s personal financial plan often requires discipline and perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.
- Monitoring and reassessment: As time passes, one’s personal financial plan must be monitored for possible adjustments or reassessments.